Iceland’s economy shrinks at record pace

| December 7, 2009
Iceland's economy shrinks at record pace

Iceland’s economy plummeted at its fastest pace on record in the third quarter, falling by 5.7% compared to the previous quarter.

However, on an annual basis the economy contracted by 7.2% – the biggest fall on record.

The news comes as many economies throughout the world are now recovering as they emerge from recession.

However, Iceland was severely hit by the financial crisis last year which led to three of its largest banks (Glitnir, Landsbanki and Kaupthing) having to be nationalised at the height of the crisis last autumn.

This led the Iceland Government to seek billions of dollars worth of aid from the International Monetary Fund, as well as a loan from the European Union to help it survive the financial turmoil.

The country is set to recapitalise its three major banks and it is hoped the plan will get the banking system on a stronger footing.

However, according to analyst Petter Sandgren from SEB bank: “Domestic demand in Iceland is very depressed because there is still no fully functioning financial system.”

“So possibly, the domestic side will continue to have quite a tough time,” he added.

Many economists are expecting Iceland’s economy to continue to contract next year.

In related news, Iceland’s central bank reduced interest rates last month from 12% to 11%. Iceland’s Central Bank (Sedlabanki Islands) has aggressively cut rates since March when they stood at a record high of 18%.

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